Wednesday, October 15, 2008

Credit Crisis and Emergence of Career of 21 st Century: Scenario Planning

Every cloud has a silver lining. Behind every adversity lies a possibility. The adverse impact of credit crisis on big corporations, may prove to be a silver lining for emergence of Scenario Planning as a profession and a career option

Couple of weeks before Lehman’s bankruptcy, its CEO Richard Fud said that the crisis was under control and that Lehman would sail it through. So was the case with Merrill Lynch CEO John Thain, he repeatedly said that Merrill would not require any further cash infusion and it would sail through the crisis.

Further, take the case of SAP CEO Henning Kagermann, who, couple of weeks back, said that he doesn’t sees any major impact of financial crisis on SAP. Two weeks later, SAP reported drop in sales and earnings, which according to Kagermann was due to very sudden and unexpected drop in business activity in last two weeks.

Were these CEO’s misleading the market earlier or did they actually didn’t knew and have not anticipated these events? I would like to believe in the latter. Their planning and intelligence process was not providing insight to visualize such a catastrophic crisis and to be prepared for the same.

Even before the credit crisis, the same planning issue, was highlighted when Ericsson CEO missed the severity of telecom downturn in late 2007 and had to reiterate his most confident outlook to most gloomy, in one week. World doesn’t completely change in one week, the clues are always there to anticipate the changes well in time.

These CEOs may even witness criminal proceeding against them for misleading the market and destroying investors’ wealth.

Though events like these are hard to predict in advance, their signs are often evident much before they occur. Few were able to detect some of the signs of changing times, but they too were surprised by the rate of change.

I wrote about rate of change in my earlier post as mega trend of this century

Complexity and Rate of Change in Business Environment are two mega trends of this century.

How can companies plan in the complex environment? Well as a starter, planning cannot be linear in this complex business environment. It cannot be a mere budgeting exercise extrapolating past performance with some adjustments.

The planning has to be scenario based.

What are scenarios? Scenarios neither are optimist, pessimist cases nor are wild predictions. Scenarios are neither risk management exercise nor contingency planning. Scenario represents instead possible alternative dimensions of the future that reflect the driving forces of that future. Understanding of these alternative dimensions of future can help corporations in preparing better. One or more scenarios will occur, depending on how future unfolds and corporations are preparing for the same.

Origin of scenario planning – Though today there is abundance of literature on scenario planning, its origin can be traced to Shell Planning Process in 1970-80’s. They envisioned scenario of Fall of Communism in Russia and helped prepare Shell its strategy around it.

Refer the book “The Art of Long View” by Peter Schwartz explaining scenario planning

Scenarios help to drive dynamic understanding of the trends and markets and relate planning to it. Employing Scenario Planning process, corporations can identify future scenarios based on current trends and then work backwards for planning.

Working backwards, Scenario Planners need to identify events, milestones that will increase or decrease probability of each scenario. It has to be dynamic activity with periodic updates both on status of existing scenarios and on developing of new scenarios.

Scenario has to come in main stream of planning activity. Even external communication to media, investors, and analysts should be through scenario.

Danger – Poor Implementation.

Though scenario planning is becoming popular, many implementers do not understand the basics of scenario planning. What I have seen in many corporate planning exercises is developing of three scenarios i.e. normal scenario, better scenario and worse scenario. The templates of these scenarios are filled like a linear plan for a normal scenario and +-20% for better and worse scenarios. This approach will not give any unique insight and will not help organizations prepare better.

Companies need to envision scenarios and plan accordingly to survive or win in this complex business world.

While scenario planning will be relevant for organization of any size, big corporations can drive more value out of it. Small companies have agility and they can respond to external events faster. Big companies take time and they need to plan much before, where scenario planning can be helpful.

Good news is that some big organizations have started taking scenario planning seriously. Kishore Biyani in “It Happened in India” also admits the importance of scenario based planning in Future Groups Strategic Planning Process. In future difference between survivors, winners and losers will depend on their accuracy of scenario planning.

Scenario Planning might even become most sought career in future somewhat like management consulting has become in last few decades. However, scenario planning will require both left and right brain equally as opposed to management consulting which relies more on left brain. But the question is how MBA’s will learn to use the right brain?